Keep in mind that the prospectus can not assume contango in all cases (all though we know it is more likely than backwardization, it is not a guarantee.)
Further, think about the case where the index round trips from 1500 to 2000 to 1500 over 2 days and what the resulting NAV impact is on the inverse funds. Because the daily returns are used to determine the impact on NAV, and gains will generally be a greater percentage than losses (as it was said before, a 105% gain is probable (maybe at .000001, but still probable), but losses are capped at 100% - if you're short, you can not have a daily 105% gain). Index round tripping can adversly affect the return of a inverse fund which is reset daily.
Put another way, leverage changes relative to the futures contracts on index movements (see Ps-40 and Ps-41 of the prospectus for the disclaimer).
The same round trip does not affect the NAV of a single-weighted long like VXX, but also affects the 2x funds.
Look at the short-term impacts from 1/29 to 2/8 - the index is basically flat but it's movement up/down has caused a flat VXX NAV but XIV has lost about 1% of NAV. This would be even more severe on extreme movements. The return was in total negative from 12/11 to 1/3 on an index basis, but XIV lost over 5% on the year-end spike.
All the inverse funds have that bad behavior.
To know how bad it is when you consider doing a long XIV and long VXX trade .. you will lose money gauranteed. Thought of shorting both, but the returns are less than with a straightup vxx short.
Just watch the futures (and spot). If spot is less than front month, and front month is less than second month, then XIV/SVXY go up over time. If the relation changes,then sell & move to the side-lines, until return. Front month expires at spot (give or take a slight premium or discount). It does not take a PhD to figure that out, and most of them are Pathetically Hopelessly Determined, and not post hole diggers,,,have worked with many from that lot.
These instruments are designed for short term trading dude. If vxx goes up 40% in one day, xiv will drop 40%. From August 2011 to Sept 2011 tvix went from 15-109 while xiv went from 20 to 5 during that period. Both xiv ,and tvix ended the year in red.
There is one big difference. Because market sell-offs tend to be shorter and more violent than upturns, XIV will probably come back. Like it did from 2011. VXX and TVIX will more than likely never make it back to the 2011 highs.
You are correct though, all volitility etn's or etf's are meant to be traded not bought and held. With that being said, if the VIX spiked to say 40-50, I would buy XIV and hold for a while.
I am willing to bet noone can explain this. A couple of months ago it was proposed that a few thousand dollars invested in XIV would be worth millions in 10 years. Think that was suggested by mistermandaly.
That was actually suggested by Bobwins_0_phile, which i find absurd. During a bull market, xiv and svxy can give you an average return of 100% annually. In august 2011 to september 2011 xiv went from 20 to 5, at that time tvix went from $15 to $109(Both xiv, and tvix ended 2011 in red). A crash like the one in october 1987 can easily cut xiv in half.